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Here’s how you explain GST to your grandma

GST will not trim the amount of tax you pay for a pizza. But it will make it less tiresome to pay and collect. Most of all, it will leave your pizza fresher when it gets delivered to you.

Yes, yes, we know you’ve been subjected to a truckload of information on the Goods and Services Tax. Consultants have written tomes on how GST will take away the ‘cascading impact’ of taxes, CEOs have praised it for ‘ease of doing business’ and TV anchors are gushing about ‘one nation, one rate’.

But what does GST mean to your grandmom? Can you explain it to her? We decided to skip the jargon and answer that very pertinent question.

From taxes, taxes everywhere

Let’s imagine that, over this long weekend, you popped over to the Nilgiri’s supermarket with your grandmom to stock up on monthly provisions. At the checkout counter, you’ll notice multiple VATs (value added taxes) added to your bill.

Depending on the groceries in your shopping cart, you could be paying VATs at different rates — for some items at 5 per cent, for others at 14 per cent. A bill for Rs. 5,000 could set you back by about Rs. 475 in VATs. Those VATs empty into the coffers of the Tamil Nadu State.

If your grandmom decided to dine on a pizza after the hectic shopping and ran up a bill of Rs. 1,000 at the pizzeria, the even longer list of taxes could well give her indigestion. She would need to shell out Rs. 56 as service tax, Rs. 2 as Krishi Kalyan Cess, Rs. 2 as Swacch Bharat Cess and a VAT of Rs. 20. The service tax (at 14 per cent on 40 per cent of bill value, plus two cesses of 0.5 per cent each) goes to the Centre for the restaurant services that you availed of. The State extracts VAT for the ‘goods’ you gorged on.

Suppose you decided to chill at the multiplex next, you’ll be slapped with an entertainment tax of 30 per cent on your movie tickets (not if it’s Kabali though, which has been exempted).

In short, this weekend jaunt which should have cost you Rs. 6,170 in a fantastical tax-less world has set you back by Rs. 625 more due to multiple indirect taxes.

So, what will GST do to your grandmom’s weekend outings?

Fewer taxes, at unified rates

Firstly, it won’t make those taxes disappear. But it will make her life simpler by ‘unifying’ many of those taxes.

We all know that both the Central and State governments in India love indirect taxes. And just so that we don’t notice it much, they label them innovatively and stow them under different heads. What GST will do is to sweep (‘subsume’) many indirect taxes into a single label.

As things stand, the Centre has agreed to sweep excise duty and additional excise duty, service tax, countervailing duty, surcharge and cess and central sales tax into the waiting arms of GST. The States have obligingly agreed to give up VAT (sales tax), entertainment tax, luxury tax, taxes on gambling, octroi and entry taxes, cess and purchase tax. GST will thus replace all of these taxes.

But if you’re expecting GST to trim the taxes on your grand-mom’s outings, perish the thought.

Just so they don’t squabble, the GST on every transaction within a State is to be split equally into a Central GST and a State GST. When goods are shipped from one State to another, the Centre will collect an integrated GST from the seller which rolls both into one.

So in a post-GST world, your grand-mom can pay GST instead of the different VATs at Nilgiris. At the restaurant, she can again get by with GST instead of service tax, VAT and cesses — all paid in bits and pieces. At the multiplex, it would be GST again, instead of entertainment tax.

In short, GST will simplify taxes on her purchases. But there will still be a Central GST and a State GST, and three or four GST rates to deal with.

No tax cuts, though

But if you’re expecting GST to trim the taxes on your grand-mom’s outings, perish the thought. How GST impacts your indirect tax outgo will depend on the basket of goods and services you consume. If you use a lot of services, in fact, you will likely end up paying more.

Why is this? Well, the GST looks to replace the variety of indirect tax rates with just three standard rates. The final rates are not yet decided. But as things stand, the rates being talked about are 12 per cent for essential goods, 40 per cent for ‘sin’ goods such as luxury cars, paan masaalaa and soft drinks, and 17-18 per cent for all the remaining goods and services.

So, if your grand-mom was buying cooking oil and other essentials at a 5 per cent VAT, she may now have to pay a GST of 12 per cent. The service tax of 15 per cent on your Ola rides, mobile phone calls and restaurant outings may shoot up to 17-18 per cent. But yes, you can look to save quite a bit on items that suffer multiple indirect taxes (like cars) or usurious rates (like movie tickets). A lot here depends on the actual GST rates decided on by the GST Council. Some big-ticket items (petrol and liquor) are being kept out of the GST ambit too.

Out with double or triple tax

So, how come everyone’s going gaga over GST? It will not really make anything cheaper, will it?

It should, thanks mainly to the magic system of seamless input tax credit under GST. Though India is already supposed to be on a ‘value-added’ tax regime where taxes paid on inputs are supposed to be deducted from taxes due on final products, this exists is in name only. A variety of taxes — central sales tax, additional excise and customs duty, luxury tax, to name a few — are not eligible for such set-offs. As a result, both producers and sellers end up paying taxes on the same inputs over and over again.

This ‘cascading effect’ is best understood by our pizza example. Let’s assume our pizzeria in Chennai sources wholewheat aattaa (dough) from Punjab for its thin-crust pizzas. So, a 5-kg sack of aattaa, which costs Rs. 100 at the farmer’s mill may suffer a Central Sales Tax when it is shipped to a wheat merchant in Bhopal, a Central Sales Tax once again when the merchant sells it to a supermarket in Chennai and finally, a VAT when your pizzeria buys it from the store. With each of these intermediaries also baking in their profit margins, you can see how a Rs. 100 bag ofaattaa ends up costing the pizzeria Rs. 150, contributing to a pricey pizza.

The beauty of GST is that it will allow the pizzeria, super market and wheat merchant to each claim credit for all taxes paid by their suppliers while calculating their own tax outgo. This will cut out the insidious tax on tax.

But do note that you — the pizza-eater — will get to enjoy these savings only if the restaurant passes on the lower cost to you and doesn’t choose to pocket it.

Source: empcom.gov.in

Quicker transit

Finally, one clear benefit you can expect from the GST is that it will crunch the time taken for goods to zip across the country. Today, if a truck ferrying produce from Punjab to Tamil Nadu passes through six different States, it is stopped at the checkpost and subjected to entry tax or Octroi before being flagged off at each of the six States.

This makes for snail-like progress for any goods taking the road route to any part of India. By official estimates, about 6 hours out of the 24-hour daily travel time for Indian trucks is whiled away in such delays. GST, by doing away with such hold-ups, may help trucks zip across State borders.

That means products arriving in a more farm-fresh and newly-minted condition at your neighbourhood supermarket. So, even if your pizza remains quite pricey, at least it will taste much better, thanks to GST!